Costco Operations Study

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Team SC^2 Sunny Jain Vikram Kaledhonkar Eva Lo Eileen Long Olena Marchenko

Costco Wholesale Operations and Supply Management OMIS 357 (Fall’09)

Agenda
•  •  •  •  •  •  •  Background and Business Model Processes and Queues Management Supply Chain Strategy Quality Control Inventory Management Recommendations Q&A

Background
•  •  •  •  Headquartered in Issaquah, WA 550 warehouses in 40 states Present in 6 countries outside US $71B revenue in 2008 1993: merged with PriceClub: PriceCostco (206 locations) 1998: Costco.com 1999: Costco wholesale 2009: 417 worldwide. 7th largest retailer in world, fortune 500

1975

1980

1985

1990

1995

2000

2005

2010

1976: 1st PriceClub warehouse

1983: 1st Costco warehouse

1996: PriceCostco to Costco companies Inc.

2003: 24 new warehouses

Corporate strategy

Business Model
•  Three fold model
–  Sales of Goods
•  5 major categories

–  Memberships
•  Goldstar, Business and executive •  87% renewal rate in Goldstar •  98% renewal rate in executive

–  Ancillary services
•  Gas, pharmacy, photo, hearing aid, food, optical

Processes
•  Overall product flow diagram •  Make-to-Stock •  Cost advantage: warehouse = buffer + retail Costco Warehouse Buffer Customer places order

Supplier Vendor Goods

Costco Depot

Deliver

Distribute
Costco Warehouse Customer places order

Buffer

Deliver

Processes
•  Product flow within warehouse

Costco Depot Goods

Warehouse

Customer

Arrival by Truck

Stock/Shelve

Sell

Inventory Measurement

Feedback

Queues
•  Customer order flow and queue control •  Multichannel, single phase & single channel, single phase; Members/hour statistics Queue

Enter Store

Shop around

Queue

Queue

Queue

Customer Service

Checkout

Photo / pickup

Queue

Exit

Supply Chain System

Services Capacity Management
•  •  •  •  75000 full time employees 62000 contract based employees Seasonal demand Resource budget as a fixed percentage of revenue •  Complete authority to store manager

Quality Control
•  “Not cheap goods, but quality goods at a cheap price” •  Design quality •  Quality of conformance •  Quality at source •  Customer service quality – Lifetime return guarantee

Inventory Management
•  Computer system is used to share inventory information between corporate/regional offices and warehouses. •  Inventory is replenished based on inventory information in the computer system

Inventory Management
Push inventory system: Corporate office = > Warehouses However:  warehouse managers are encouraged to bring 5 local vendors a year  warehouse managers can request additional quantities of the products (Ex. during the holidays)

Inventory Management
•  •  •  •  Just in Time Inventory Try to turn products as fast as possible “Goal is never to be over or under stock” Very high turns : –  For perishable items, 35 times a year. –  Inventory turnover ratio is 11.9 (compared to industry average 7.6)

Inventory Management
•  Safety stock determined by corporate/ regional office •  No statistical methods used to determine safety stock, just transaction history information •  S.S. based on calculation of a minimum display and on minimum of volume

Recommendations
•  Services and Products
–  Increase product and service offerings
•  Organic and sustainable foods •  Green services like electronics recycling •  Locally grown and made products

Recommendations
•  Supply Chain
–  Apply computer automation –  RFID –  Inventory levels •  Apply stocking out statistical models •  Adjust target average inventory for marketing

–  Vendor systems
•  Negotiate best payment terms •  Vendor managed inventory

–  Apply queuing theory and models

Questions?...
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